Summer lovin'

It's easy to fall for a vacation locale, but is it wise to buy a home there?

CHICAGO (MarketWatch) -- When the Hohnstines became true empty nesters -- their children finished with college -- the couple bought a vacation home. They figured if they enjoyed their vacations near the Delaware shore, they would eventually retire there as well.

As it turns out, the home near the beach has been like a magnet in attracting their children and grandchildren, and because the home is only a three-hour drive from their primary residence in Virginia, many weekends have been spent there since they bought in 2002, Lyle Hohnstine said. Soon, the home at the Village at Bear Trap Dunes in Delaware will be their primary home.

Baby boomers with discretionary dollars to spend, like the Hohnstines, have fueled an increase in the number of vacation-home sales in recent years. In fact, the National Association of Realtors reported that a record 1.07 million vacation homes were sold in 2006, a 4.7% increase over 2005.

While the majority of buyers, 79%, said that they bought the home to use for vacation or as a family retreat, 34% said a reason for buying was to diversify their investments, according to the Realtors' survey. Twenty-eight percent said they planned on using the home as a primary residence in the future, and 25% said the tax benefits were a reason to buy. And 21% bought because they had extra money to spend; 18% of buyers planned on renting out their homes.

While "a good vacation home is a great way to bribe your kids to want to hang out with you when they're older," as Kenneth A. Kamen, president of Princeton, N.J.-based Mercadien Asset Management said, the costs of a home are often underestimated. The flipside: "No one is going to have fun basking in the light of their municipal bond," he said.

Before cementing a decision to join the growing ranks of vacation-home owners, consider the following:

1. Is it really practical?

It's easy to become enamored with a place while on vacation, leaping to the conclusion that owning a home in the locale would allow the entire family to more frequently enjoy this little slice of paradise. Some of Kamen's clients figure that they're spending a good chunk of money on vacation every year anyway -- why not invest in a vacation home?

His answer: "When you by a vacation home you're committing to spend that (money) going forward." Not only that, a buyer is committing to spend most vacation time in a particular place and giving up some of the flexibility afforded by staying in a hotel or home rental.

Sure, the place could be rented out to recoup some of the costs, but then the owner must take on the role of a landlord, effectively starting a small business, he said.

Often, when costs including real-estate taxes, insurance and utilities are factored into keeping a vacation home, families are better off renting a home for vacation instead, said Sheryl Garrett, founder of the Shawnee Mission, Kan.-based Garrett Planning Network. In addition to vacation flexibility, this way they can also forgo time and energy spent on chores such as cutting the lawn -- or the cost of hiring a maintenance crew.

2. Will it be affordable?

It's difficult to justify spending $250,000 on a property that you can use only four times a year, Garrett pointed out. That's why it's critical for people to estimate how much they will be able to use a vacation home and what the home will actually end up costing them.

This estimate should include travel costs -- not a small aspect when a home isn't in driving distance. Plus, don't forget insurance, which often can be more than 50% more expensive than insurance on a primary residence, she added.

Kamen's advice: Figure in all of the expenses associated with the vacation home then add 10% to 15% as a buffer for when the unexpected happens -- like when the water heater needs to be replaced or bad weather damages the property. If you're going to have to count pennies to make mortgage payments, maybe a second home isn't the best idea, he said.

3. Consider future plans

However, if a home buyer is considering a vacation home as an eventual retirement home, buying in advance to try out the new location could be smart, Garrett said.

If it's a legacy the home buyer wants to create, driven by the thought that future generations will want to use it for years to come, buying also isn't a bad idea, Kamen said. After all, even if the home is sold, children and grandchildren may be able to benefit from the asset.

4. Choose a location

Before starting the actual home search, decide what the home will be used for, advised Elizabeth Hudgins, a Jacksonville, Fla.-based Realtor with Prudential Network Realty. For example: Will it be a getaway during the winter months, summer months or both?

Also consider whether nearby recreational activities are important or if it's a place for retreat and solitude, said Patti Grimes, vice president of sales and customer relations for Carl M. Freeman Companies, which built the golf community the Hohnstines have a home in.

Think about the ideal proximity to a primary home as well. The Delaware shore communities built by the firm are popular with people from Washington, Philadelphia, New Jersey and New York because the drive to the homes isn't unbearable, Grimes said.

"What we found is that people spend more time at their vacation homes today than years ago," she said. The difference is they're often not spending it weeks at a time, instead leaving the office early on Friday and driving to the vacation home for a weekend away, she said.

5. Do the research

After deciding on the general location, Hudgins suggests starting a home search online.

A Realtor in the area also can be of particular help in finding a vacation property because of his or her local knowledge, said Christine Karpinski, an Austin, Texas-based author and speaker on vacation home rentals. If possible, use an agent who specializes in selling second homes; buyers and sellers can search for those with a "Resort & Second Home Property Specialist" designation through Realtor.com's "Find a Realtor" link.

6. Fools rush in

It's fine to look at homes while on vacation, but never buy one at that point, Karpinski advised. This may be easier advice to follow now than when the real-estate boom was in full swing and vacation homes were "selling like hotcakes," she said.

Instead, take the knowledge from the trip and do some homework, she said. There's not any urgency to buy a vacation home, so buyers should take their time, she added.

7. Is it rentable?

Many second-home owners don't buy a home with the intention to rent it out. But it's wise to know if a property is rentable at the time of purchase for a couple of reasons, Karpinski said.

For one, people often rent a home out if they're not using it as much as they originally thought, she said. A rentable property might also be a selling point at resale, she added.

"There's definitely a honeymoon period when they buy it," she said. "After two or three years, you realize your life is way too busy," and visits to the home aren't very frequent.

Before buying, ask about renting terms if applicable. For example, some condo communities have leasing restrictions to comply with, Hudgins said.

For single-family homes, remember it is often easier to rent property when there are other rentals around it, Karpinski said. Secluded homes could have less success attracting renters.

Amy
Hoak

Amy Hoak is a MarketWatch editor and columnist based in Chicago. Follow her on Twitter @amyhoak.

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